Budget and loans of the government

Bangladesh's public debt stood at USD 148 billion in the fiscal year 2021, about 41 per cent of the GDP. Out of this the external debt accounted for USD 62 billion, or 18 per cent of the GDP. During the FY2020-21, Bangladesh's debt service to revenue ratio rocketed to 81 per cent, which was 56 per cent in the pre-pandemic year. The increased level of debt service to revenue ratio means that if the government earns Tk 100 in taxes, it has to spend more than Tk 81 to pay off loans instead of Tk 56 in 2019.

According to central bank statistics, Bangladesh's per-capita foreign debt ballooned to USD460 or Tk 39,000 in the fiscal year 2021, up by over $67 from the figure a year before.

In the budget for ongoing FY22, Bangladesh is projected to spend Tk 68,589 crore for paying interests against both internal and external loans. The government will spend Tk 62,000 crore for paying interests against internal loans and Tk 6,589 crore for interests on external loans.

Bangladesh is projected to spend Tk 77,055 crore and Tk 88,160 crore as interest payments in FY23 and FY24, respectively. Of these figures, Tk 69,800 crore and Tk 71,430 crore will be spent on paying interest for internal loans in FY23 and FY24, respectively.

In 2008, Bangladesh's total external debt stock was $23.4 billion, which rose to $52.1 billion in 2018, an increase of 122.68 per cent. The total foreign debt held by Bangladesh has more than doubled over a period of 10 years, a World Bank report said.

The Finance Division has reportedly proposed a Tk 7 trillion budget for the upcoming fiscal year. It has been reported in the media that a proposal has been made to increase the size of the FY23 budget by 12 per cent from the current one and will be little more than 15 per cent of the total national GDP. Bangladesh needs to tackle the rising inflation and keep the balance of payments in check. Accordingly, the budget deficit also promises to be massive. After calculation, the authorities found the deficit in the huge budget could stand at Tk 2.4 trillion, almost 5.5 percent of the GDP. The government is considering taking out foreign loans in order to meet a deficit close to Tk 2.4 trillion. A proposal has also been made to borrow over Tk 1 trillion from domestic banks, an increase of about 33 per cent.

Bangladesh spends around 2.5 per cent of its GDP annually for repaying the interests of domestic and foreign loans. The country's expenditure in this sector has been rising by around Tk 6,500 crore annually, but it is projected to go higher in the coming years. Resources that could have been spent on essential sectors like health, education or public investment are now being dedicated to interest payments. It happens because of higher debt servicing payments. There would be less availability of resources for development and other priority expenditures, including those required for post-pandemic economic recovery. This will put pressure on public finance.

Debt repayment has to be undertaken with regard to domestic debt as well as external debt. Sometimes, governments focus more on external debt than domestic debt, even though domestic debt may be substantial. While domestic debt can be paid in terms of domestic revenue, foreign debt has to be paid in terms of foreign exchange accumulated through export earnings. The government may have more flexibility in managing domestic debt servicing compared to external debt servicing.

An in-depth look at the debt servicing of Bangladesh raises some structural public debt issues. Firstly, the debt servicing situation worsens because the interest payments on debts remain at high rates on national saving certificates, expensive bank borrowing, delay in executing the projects, and irrelevance and overvaluation of projects. For example, the government provides higher interest rates on national savings certificates.

Secondly, the government has opted to borrow more in recent years because of revenue constraints, including through non-concessional and hard-term loans from foreign lenders, resulting in higher repayments. The borrowing has been undertaken to finance current expenditures and service existing debts, accounting for the largest part of the expenditure. Sometimes, the government has to borrow to finance big projects, the debt repayment on which is also substantial.

Bangladesh is now a lower-middle-income country and graduating from the Least Developed Country (LDC) status. Borrowing and debt repayment would become harder for Bangladesh in the future. In many cases, some multilateral and bilateral donors have increased their interest rates and service charges but have reduced the grace periods. By this time, the Asian Development Bank (ADB), the second-largest multilateral donor of Bangladesh, has increased lending from its non-concessional window. Since Bangladesh became an LMIC, the World Bank and the Asian Development Fund loans have been decreasing year-on-year. Japan, the largest bilateral donor of Bangladesh, has also made its lending terms harder—as it's been charging 0.10 percent interest rate in recent years against 0.01 percent a few years back.

More importantly, the average revenue mobilisation is quite weak in Bangladesh. In the fiscal year 2021, the revenue mobilisation in Bangladesh was around 10 percent of its GDP. It is less than half of that of 25 per cent in emerging and developing Asian countries. The revenue-GDP ratio in Nepal is 22 per cent, In India, it is 20 per cent and, in Pakistan, it is 15 per cent. Therefore, Bangladesh has a lot of catching up to do.

Despite all its limitations, Bangladesh's public debt at 41 per cent of its GDP is still way lower than the risk threshold of 70 percent estimated by the International Monetary Fund (IMF). The country's external debt service to revenue ratio reached 10 per cent in 2020, but it is still below the risk threshold of 23 per cent. But there is no room for complacency. Bangladesh needs to be cautious about its debt and debt servicing.

The government has taken out a large amount of foreign loans to implement mega projects. Under different bilateral, multilateral, donor agencies, suppliers' credit, and lines of credit, foreign loans have piled up, causing the repayment expenditure to go up as well.

According to the finance ministry estimation, the country will have to repay $7.13 billion in principal and $ 2.95 billion in interest between FY23 and FY25. These figures show a 13.45 per cent rise compared to FY22, which is estimated to hit $2.45 billion. In the current FY, the government is projected to repay $1.72 billion principal and $0.73 interest.

Economists have cautioned that the country is set to face the worst time after three years in terms of servicing foreign debt. The situation might be even beyond estimation if the forex volatility continues for a longer time.

After graduation, Bangladesh would have to borrow at higher rates, further increasing its debt-repayment amounts. In that context, the country should also look to attract non-debt creating financial inflows, such as foreign direct investment (FDI), and increase exports and remittances from expatriates. Furthermore, Bangladesh should ensure the best use of the costly loans through the quality implementation of projects and checking misuse and leakage of funds. Domestic borrowing should also come under further scrutiny, as it costs the economy more because of borrowing at higher commercial rates.

The writer is a legal economist and adviser, Bangladesh Competition Commission. He can be contacted at mssiddiqui2035@gmail.com